5 financial lessons from Nobel laureate Richard Thaler

In the early 1980s, he published a study in which he outlined his seemingly very radical ideas. Most of the university colleagues did not accept them. However, Thaler's ideas subsequently made a great contribution to the development of modern behavioral economics, which combines elements of economics and psychology. The goal of behavioral economics is to find out why people make certain decisions.

Thaler's many studies and discoveries are of great benefit to both science and society as a whole.

1. Auction winners often lose their money

One of the most popular early works by R. H. Thaler. Anomalies: The Winner's Curse / The Journal of Economic Perspectives Thaler is titled "The Winner's Curse." Its main idea is that auction winners tend to overpay for what they buy.

The curse of the winner manifests itself in two cases: when a person pays for some product more than its real value, or when he buys something that in the end does not meet his expectations. Thaler is confident that this phenomenon proves the irrational behavior of bidders.

According to him, the winner's curse is based on the tendency of people to make mistakes in trying to offer the right price at an auction. In addition, due to the large number of bidders, people behave more aggressively and compete with each other, simultaneously increasing the price of the goods.

2. People exaggerate the value of their own things

Another concept D. Kahneman, J. L. Knetsch, R. H. Thaler. Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias / Journal of Economic Perspectives, popularized by Richard Thaler, is called the "ownership effect." This phenomenon consists in the fact that a person is strongly attached to his things and overestimates their value.

The professor conducted an experiment in which students of economics took part. He handed out university coffee mugs to half of them and asked everyone to price them. It turned out that those students who had mugs rated them higher than those who did not have mugs.

The reason for this phenomenon may be related to fear of loss, when people tend to overestimate the pain of losing something and underestimate the pleasure of acquiring it. In one of his works, R. H. Thaler. Toward A Positive Theory of Consumer Choice / Journal of Economic Behavior and Organization Thaler argues that the phenomenon of the ownership effect explains why few claim damages for poorly developed photographs.

3. Foresight is a very useful quality

One of the main reasons why Richard Thaler was awarded the Nobel Prize is his work on the topic of self-control.

Each of us knows to save money for retirement, but relatively few people actually do it. This is because people find it difficult to combine long-term preparation with everyday needs and temptations.

To explain this phenomenon, Thaler proposed a planner / agent model that is widely used by psychologists and neuroscientists. His model explains, for example, why people spend money on cigarettes, even though they understand that giving them up would allow them to accumulate a decent amount.

This simple discovery helped to identify a way to save more money: automate the transfer of funds to a bank account.

4. Pay attention to what subtly influences decision making

Richard Thaler and his colleague Cass Sunstein developed the "nudge theory", according to which external factors, the so-called nudges, influence decision-making. In other words, this is a way to direct a person in the right direction so that he makes the right choice.

Thaler strives to ensure that the state is aware of how people make decisions. For example, he suggests transferring workers to an automatic pension accumulation system, which can be abandoned if desired. The goal of his research is to teach how to nudge people to make the best decisions.

5. People overreact to bad news and underestimate good news

Unsurprisingly, Thaler's ideas also influenced the investment strategy. For example, if recently investments have brought a small profit, then the investor, reacting violently to this news and panicking, only worsens the situation. This negatively affects the exchange rates. According to Thaler, many investors are better off not receiving monthly financial statements.